Co-op Bank’s new millionaires

It was the initial public share offering (IPO) that came at the lowest point of a long running stock market dip that began with the post election turmoil in January and deepened with the global economic meltdown in the last quarter of the year.

But the Cooperative Bank’s share sale, which also came in the wake of low investor confidence and earned the dubious distinction of being the first IPO to be undersubscribed in three years, still created a dozen and a half multi-millionaires – confirming the stock market’s position as the shortest route to legal fortunes in a budding economy such as Kenya’s.

It has now emerged that senior employees of the bank and members of its board became instant multi-millionaires following the listing that took place in December last year.

In what stands out as a rare scoop that is in sharp contrast to the fortunes of thousands of investors who have burnt their fingers in a bearish stock market over the past two years, official records show that senior employees and directors who bought Co-op Bank shares at a par value of Sh100 have seen the value of their investment appreciate by close to 800 per cent after each share was split 100 times and assigned a nominal value of Sh1 in the run up to the listing.

Golden handcuffs

The bank, which sold 19.3 per cent of its issued and paid for shares in the primary market for Sh9.50, opened trading at the Nairobi Stock Exchange (NSE) on December 22 at a price of Sh10.45 offering shareholders an instant 945 per cent premium.

Since its listing, Coop Bank’s share price has oscillated between Sh13.50 and a low of Sh6 per share and is currently trading at Sh8.80 a share.

But the top management and directors, who own shares in the company, cannot harvest their investment.

They have to hold onto them for at least one more year having been locked in by the regulator’s golden handcuffs to prevent them from jumping ship too early in the day.

The Capital Markets Authority (CMA) and other regulators have tended to protect shareholders who invest in freshly listed companies by tightening the procedures for offloading stocks by management and directors.

A freeze on sale of shares by directors and management for specified periods after fresh listing is ordinarily imposed as a way of locking in any company promoters with an intention of dumping their shares immediately.

The reality however is that at the prevailing price, anyone who acquired their stake at the par value of Sh1 a share is now Sh7.80 richer on paper and stands among the biggest winners from an initial public offering (IPO) that was under-subscribed by 19 per cent.

Market analysts say company share structure re-engineering before IPOs is common and only falls foul of regulatory standards if proven to have been done irregularly.

“There is no illegality as long as shareholding by management and directors is disclosed in the prospectus,” said Carol Musyoka, a financial analyst at Bungani, a private consultancy.

However, Ms Musyoka says directors who manipulate shareholding prior to an IPO with an intention of influencing share price movements in the secondary market can be held liable for losses incurred by the public.

“The regulator is ordinarily expected to scrutinise a firm’s shareholding structure before approving an IPO and that is why it takes long to list a company,” says Ashif Kassam, a managing partner at international financial consulting firm RSM Ashvir.

An approval of such an offer therefore means that the regulator is satisfied with the probity of the shareholding.

Details in Co-op Bank’s shareholding structure after the IPO show that about 17 members of the bank’s board of directors each own more than one million shares of the listed lender’s issued stock.

Their ownership has its roots in a 2007 scheme that saw the shareholders allocate a portion of the issued share to the company for purposes of setting up an ‘employee retention scheme’ in line with recent trends that have seen seven listed companies including EABL, KenolKobil, ARM, AccessKenya, Scangroup, Safaricom and Housing Finance set up employee share ownership plans (ESOPs) to attract and retain top talent on their rolls.

That scheme was meant to motivate and retain core staff, who were instrumental in turning around the organisation from its loss making years at the turn of the millennium.

Top among the beneficiaries of the scheme was Gideon Muriuki, the managing director, who bought half (680,121) of all the 1.3 million shares that were set aside for allocation to directors at a par value price of Sh68 million.

Buyers of the shares under the employee retention scheme were however catapulted into the club of multi-millionaires by the actions that the bank took in the run up to the IPO.

Months before the sale, Co-op Bank’s shares were split in the ratio of 100 for every one share held.

That move increased the existing shareholders’ nominal stock by a multiple of 100, reducing the par value by the same factor to one shilling per share.

The pricing of the share in the primary market during the IPO at Sh9.90 alone therefore lifted the value of Coop Bank employees’ stake in the firm by nearly 10 making the top dogs instant millionaires.

With more than 68,000,000 or two per cent of total stock of issued shares in his name, Mr Muriuki is the leading individual shareholder in Coop Bank.

He is also the second highest overall shareholder after the cooperative movement, which owns 65 per cent of the bank.

The share’s current pricing at Sh8.80, means Mr Muriuki’s stake in the bank is now worth about Sh600 million, representing a 781 per cent gain since the 2007 purchase.

Stanley Muchiri, the chairman’s eight million shares he acquired at a price of Sh8 million are currently worth Sh70.4 million while the vice chairman Julius Riungu’s investment has grown to Sh68 million up from the purchase price of Sh7.7 million.

Board Members

Other members of the board who stand to reap big from the IPO windfall when the golden handcuffs are ultimately unlocked include company secretary Rosemary Githaiga, directors Mcloud Malonza, Scholastica Odhiambo, Patrick Githendu and Godfrey Mburia whose shares are now worth Sh45 million each.

Share ownership by directors and senior employees of listed companies is however not unique to Co-op Bank and is in fact a pre-qualification for positions on the boards of some listed firms.

Co-op Bank’s shares were (and still are) majority owned by Kenya’s cooperative movement who generally held what were referred to as ‘class A’ shares prior to last year’s IPO. A special amendment in the lender’s statutes in 1996 however allowed for individual (class A) shareholders to buy shares of the bank.

Co-op Holdings Co-operative Society Ltd remains the anchor shareholder of the bank representing a strategic shareholding block of shares held by over 3,805 co-operative societies who own 65 per cent of Co-op Bank.

An estimated 116,068 individuals and institutions own the 3.5 billion Co-op Bank shares that are listed at the NSE.

Some beneficiaries of the value gain ‘windfalls’ that have trailed recent IPOs at the NSE include directors and founder shareholders of Equity Bank, AccessKenya, Scangroup, Eveready and Safaricom.

The listing of Equity Bank at the Nairobi Stock Exchange in August 2006, for instance, became a goldmine for big individual shareholders who became instant paper billionaires.

That list included Nelson Githinji who held an 8.3 per cent stake, James Mwangi (8.06 per cent) and John Kagema (6.29 per cent).

But like their counterparts at Coop Bank, the Equity directors and major shareholders were also locked in for two-year after the IPO before they were allowed to sell their shares in the secondary market.

Members of the Somen family and other founder shareholders of technology firm AccessKenya also stand to benefit from appreciation of the company’s share price, which has doubled from the issue price of Sh10 to about Sh21.75 this week.